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Thursday, July 26, 2007

Reserve Bank Governor Alan Bollard has raised official interest rates by quarter of a percentage point to 8.25 percent.

Announcing his decision today, Dr Bollard gave a strong hint that the latest of four successive hikes in the Official Cash Rate (OCR) could be the last, and he said it came at a time of "very good news" for the New Zealand economy.

The New Zealand dollar fell on the announcement to US80.08c from US80.25c.

A lift in the OCR today had been seen as increasingly likely after stronger than expected inflation figures earlier this month, which were followed by a strong rise in the value of the New Zealand dollar.

Today Dr Bollard acknowledged the "very high levels" of the NZ dollar were hurting exports, and he also warned the market that the kiwi currency would not be able to stay at its present giddy heights.

He said the rise in the kiwi was being driven by US dollar weakness and New Zealanders' heavy demand for borrowing.

"The high New Zealand dollar is not sustainable medium term and investors should understand this," Dr Bollard said.

"The higher OCR now gives strong incentives to New Zealanders to save.

"New Zealanders have been showing early signs of moderating their borrowing. Provided they keep this up, and the pressure on resources continues to ease, we think the four successive OCR increases we have delivered will be sufficient to contain inflation," he said.

The sharp lift in the kiwi, particularly the steep ascent in the past week or so which saw it top US81c, had led to pleas from exporters, some economists and other commentators for Dr Bollard to stay his hand today.

But Dr Bollard said the New Zealand economy was running strong.

"We are recording continued big increases in international commodity prices, especially dairy, reflecting solid world demand for our products," he said.

"This is very good news for New Zealand. Given this positive situation, some of the negative commentary circulating about the economy is unwarranted.

"However, the continued tight labour market, high capacity use, and rising oil and food prices all point to sustained inflationary pressures. That is why we are increasing the OCR today."

THE HEAT IS ON: All eyes will be on whether the red hot New Zealand dollar will keep rising after the Reserve Bank raised the official cash rate again.

LATEST: The official cash rate has been raised to 8.25 per cent by the Reserve Bank, but there are signs it may be the last increase for some time.Bollard needs wings clipped say banks

What do you think of this move by the Reserve Bank? Will it hurt your financial situation personally?Click here to send us your feedback

Announcing his decision today, Dr Bollard gave a strong hint that the latest of four successive hikes in the Official Cash Rate (OCR) could be the last, and he said it came at a time of "very good news" for the New Zealand economy.

The New Zealand dollar fell on the announcement to US80.08c from US80.25c.

A lift in the OCR today had been seen as increasingly likely after stronger than expected inflation figures earlier this month, which were followed by a strong rise in the value of the New Zealand dollar.

Today Dr Bollard acknowledged the "very high levels" of the NZ dollar were hurting exports, and he also warned the market that the kiwi currency would not be able to stay at its present giddy heights.

He said the rise in the kiwi was being driven by US dollar weakness and New Zealanders' heavy demand for borrowing.

"The high New Zealand dollar is not sustainable medium term and investors should understand this," Dr Bollard said.

"The higher OCR now gives strong incentives to New Zealanders to save.

"New Zealanders have been showing early signs of moderating their borrowing. Provided they keep this up, and the pressure on resources continues to ease, we think the four successive OCR increases we have delivered will be sufficient to contain inflation," he said.

The sharp lift in the kiwi, particularly the steep recent ascent which saw it top US81c, had led to pleas from exporters, some economists and other commentators for Dr Bollard to stay his hand today.

But Dr Bollard said the New Zealand economy was running strong.

"We are recording continued big increases in international commodity prices, especially dairy, reflecting solid world demand for our products," he said.

"This is very good news for New Zealand. Given this positive situation, some of the negative commentary circulating about the economy is unwarranted.

"However, the continued tight labour market, high capacity use, and rising oil and food prices all point to sustained inflationary pressures. That is why we are increasing the OCR today."

The .25 of a percentage point increase will hurt homeowners on floating interest rates or those whose fixed rates are coming up for renewal - about a quarter of current mortgages are due to be renegotiated during the next 12 months at fixed rates around 9 per cent.